Posted by: Josh Lehner | February 13, 2019

Lottery and Gaming Outlook, 2019

The best economic news in recent years is the growth seen in household incomes. They are rising as we have more Oregonians employed who are working more hours and for higher pay. Oregon’s growth has been considerably stronger than what is experienced in the typical state and our median household income now matches the U.S. This has not happened since the mills closed in the 1980s.

Importantly for gaming, households are feeling confident today. Consumer sentiment is high as incomes rise and gas prices remain relatively low. This is translating into more discretionary spending across the board. In fact entertainment spending — spectator events, museums, going out to eat, etc — in recent years has increased significantly faster than income growth or other types of spending. This is not debt-financed, but represents a shift in the types of goods and services households are buying today. Oregon’s aggregate growth outstrips the nation because our underlying economic gains are stronger, and due to faster population growth.

That said, while overall entertainment spending is increasing at a faster pace, it is not being spent quite as much on gaming in particular. Yes, gambling revenues are up, make no mistake. However other types of discretionary spending are rising faster. We can see this clearly in the Las Vegas chart below. Tourists are back to pre-Great Recession levels. Spending on Leisure and Hospitality is at historic highs. However gaming revenues are just now getting back to where they were more than a decade ago. There has been a shift in consumer patterns, even as gaming remains a normal good in most places.

However, even in a relatively strong economy nationwide, some mature gaming markets are seeing tepid gains at best. This is in large part due to increased competition. The states leading growth in recent years (MD, OH, NY) have all recently legalized gaming, added new casinos and significantly increased the number of slot machines. Much of these gains have come at the expense of their neighboring states, who legalized gaming years and decades ago.

With this nationwide background, Oregon stands out. Growth in video lottery sales are twice that of the nation overall and other fast-growing, mature markets like Colorado and Nevada. This highlights the impact of Oregon’s video lottery terminal replacement program has had on sales. Over the past few years, Oregon Lottery has replaced all of the VLTs statewide and upgraded the underlying infrastructure and system. As the new VLTs were deployed statewide, sales increased as discussed before. Roughly speaking, given national trends, half of Oregon’s video lottery sales growth is due to overall economic conditions and half due to the VLT replacements.

Given the cannibalization due to increased competition seen throughout the country, the biggest issue facing the Lottery in recent years was the opening of the ilani Casino Resort in southwest Washington. Beginning with our 2016 forecasts, our office incorporated a large impact from the new casino in the outlook. However, a big impact has yet to materialize. The actual impact on sales is running about 15% of our initial projections from a few years ago. This impact is smaller and more geographically confined than initially expected. As such, our office’s forecast for this biennium has increased considerably — $162 million total, with $102 million coming from stronger video lottery, $43 million due to the billion dollar jackpots, and $17 million due to more administrative savings from Lottery. In somewhat comforting forecast news, our office was not alone in overestimating the impact on the local gaming market. That at least makes us feel a little bit better.

Looking forward, at this point our office does not expect there to be further, significant impacts from the casino on our statewide forecast. Now, there may be ongoing issues, even a further erosion of sales at retailers along the border, but these are not likely to impact the topline forecast much. One main reason is that new casinos tend to ramp up for a year or two before stabilizing, or even seeing some declines. ilani will hit the two year mark here in a couple of months. One potential future change that would cause us to revisit these assumptions would be a hotel addition which would change the casino from a day trip into more of a destination. Our office and the Lottery research team continue to monitor these trends and discuss the outlook.

All of that said, the underlying outlook for Lottery remains closely tied to the economy and income. That strong video lottery growth mentioned above (26%) perfectly matches the growth in Oregon personal income (26%) over the same time period. Lottery as a share of income in Oregon remains stable in recent years, and of course this is lower than the housing bubble highs hit just after the introduction of line games back in 2005.

There are two main points to make in terms of the Lottery outlook.

First, Lottery sales continue to increase. Oregon is and is expected to see increases in employment, wages, household incomes, and overall population in our office’s forecasts. As such, sales and available state resources (transfers) will increase in the future. These gains overall will be in the 3.5-4% range per year.

Second, our underlying personal income forecast for Oregon is around 5% per year. This means that video lottery sales will grow but at a slightly slower pace than overall income in the state. This is due to three main risks to the outlook, excluding recessions and the business cycle in general. One is increased competition for entertainment spending. As discussed, discretionary spending is rising, but other entertainment options like going out to eat, or to the movies or sporting events are grabbing a somewhat larger share than gaming. Two is increased competition within the gaming industry, be it another private casino, online gaming (legal or illegal) or the like. As seen nationwide, gaming competition only increases. Three is the potential change in gaming preferences among younger generations. There is no question that Millennials and Gen Z (still a placeholder name) enjoy gaming. However it is much more Xbox and Playstation and less slot machines and card tables than their parents and grandparents.

Bottom Line: Oregon Lottery sales continue to increase due to an improving economy and new game offerings. The outlook calls for ongoing growth and an increase in available resources for the state budget. However, the outlook is not without risks. Our office tends to view competition for household entertainment spending, other gaming options, and shifts in tastes and preferences to be more downside risks to the outlook. That said, to the extent these risks do not materialize or they have less of an impact — not unlike ilani — revenues will be higher than the baseline.

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Posted by: Josh Lehner | February 7, 2019

Marijuana Demand, Supply and Substitution

Notes on three new marijuana research pieces that has come out recently.

First, 2017 state level estimates of drug and alcohol use were released this week. What it shows is a continuation of trends related to marijuana use in the past decade. States with legal recreational and medical marijuana generally see the highest usage rates and have also seen the biggest increases.

Reported usage rates in Oregon have increased substantially over the past couple of years. Oregon is now #1 among all states with 20% of the adult population admitting they have used marijuana within the past month. Vermont (19%), District of Columbia (18%), Colorado (17%) and Alaska (17%) round out the Top 5. Now, it is somewhat of an open question just how much actual usage has increased versus residents becoming more willing to admit usage to federal survey takers. That said, these usage rates are up across the nation. Since 2009, only three states (GA, HI, SC) have not seen a statistically significant increase. National usage rates are up 3.2 percentage points (a 50% increase), with the median state seeing a 2.8 percentage point increase. Oregon’s increase is nearly 11 percentage points.

Second, OLCC released a new report to the Legislature on recreational marijuana supply and demand. Full disclosure, I was on the report’s review committee and think OLCC — Amanda Borup, Peter Noordijk, TJ Sheehy– did some really good work here and want to highlight the findings.

Probably the biggest take away from the report is that over the course of a year, Oregon’s recreational marijuana program produced about twice as much marijuana as was purchased by consumers. There are years of inventory currently sitting on the shelves at retailers, and being stored by producers and wholesalers. This is the supply-demand imbalance that is most measurable because it is in the legal system and tracked (for the most part). We know there is even more supply coming from the black and medical markets, which are not tracked. None of this is a huge surprise given everything we’ve seen and heard in recent years. What is new is that OLCC was able to quantify the imbalance and not just add anecdotal evidence. That’s the part I want to focus on.

Our friends at OLCC tackled at least two big technical challenges. First, they were able to wrangle the available data and create a methodology to reasonably compare supply (harvest, inventory, etc) with demand (sales across product types) on as close to an apples to apples basis as you can. Marijuana is wet and heavy at harvest time, but is sold dried or in the form of concentrates, edibles, and the like. You cannot just compare these final product types to harvest data. This was a big challenge to be able to properly compare these.

The other big technical challenge centered around estimating how much total marijuana is consumed in Oregon and running some scenarios (Monte Carlo simulations) to model the probability that demand is meeting supply. To get at statewide demand, across all markets, OLCC used survey data and some academic studies. You can see part of this work in Figure 16 below from the technical appendix to the report. What it shows is how much marijuana is consumed per day by frequency of use. As with most products, heavy users account for the vast majority of consumption.

From there they could compare actual sales to this estimate of statewide demand. They found that 55% of total statewide marijuana consumption was purchased at recreational retailers. That means 45% of consumer demand is being met by the black market, medical market, and/or home grows.

From a big picture perspective, there are some clear successes here. Recreational sales used to be 0% of the market and are now 55%. Additionally, while there is an oversupply even within the recreational system, the vast majority of this product is remaining in the legal system. Currently inventory stands at around 6.5 years of sales (based on amount of THC). This is a huge number, full stop. But it also means most of the oversupply is being accounted for. All of that said, there is a concern that more may be diverted to the black market and/or out of state given current market conditions (high supply, falling prices, and a huge pipeline of applications for new entrants into the market).

The report also notes the different channels in which demand can increase to meet current production levels. This includes an increase in the number of consumers (like the first chart above), more consumption by current users (increases in the second chart above), and/or increased market share for recreational marijuana. I believe we will see improvements in all three areas. In fact the usage numbers reported above are already above the Monte Carlo upper bound from the OLCC report — note that this is just one component of the work and by itself is not enough to overturn the findings. However, given that big pipeline of applications for new producers, processors and retailers, the supply side doesn’t look like it’s slowing down any time soon either. The market continues to search for an equilibrium.

Third, the Brewers Association’s Chief Economist, Bart Watson, recently wrote up his thoughts and findings on the impact of cannabis on beer. He also provides a link to a distilled spirits report looking at cannabis and spirits, but I haven’t read that yet. In sum, Bart finds no evidence of cannabis impacting beer sales. Yes, per capita beer sales are falling but they were falling before much of the marijuana legalization in recent years. And recreational or medical state trends for beer are not different. Bart explains “most of beer’s decline [is] due to competition with wine/spirits [due to] things like demographics and prices.” There’s a lot more in his article, including thoughts on how to interpret survey results, how all of this may shift moving forward and how cannabis is impacting business operations, even if not sales (yet).

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Posted by: Josh Lehner | January 29, 2019

Oregon’s Housing Supply

Yesterday I was invited to testify about housing supply at the inaugural meeting of the Senate Committee on Housing. I was joined by Mike Kingsella, Executive Director of Up For Growth. Combined, the two of us covered the low levels of new construction, housing supply constraints, affordability being a statewide problem, and one reason our office cares so much is the risk that affordability may potentially choke off migration flows, lowering our longer-run forecasts for, well, everything. In the ensuing discussion, Senator Golden asked a number of questions in which I should have done a better job articulating my answer and our office’s research. This post helps clarify and expand upon those questions.

We know new construction in Oregon remains at relatively low levels when compared with the past. However, what truly matters is the balance between supply and demand. Taking into account population increases, and household formation is the correct way to gauge whether or not an imbalance exists, not just looking at total housing starts by themselves. The problem that arises is how best do you measure housing demand? Household formation is ideal, but it is endogenous, or jointly determined with supply and affordability. If we had more housing supply and prices were lower, then we would see stronger household formation because more people could live on their own, etc.

As a rough estimate, one can look at the number of new housing permits issued per 100 new residents. Oregon’s modern history is shown in the chart below. I have also included new permits per the growth in the adult population which may be a better proxy for housing demand. Either way, Oregon continues to see very low levels of new construction since the housing bust. Yes, new construction overall is up, but so too is population growth and migration flows. Oregon remains near historic lows for new construction on a population-adjusted basis.

At the regional level we see similar patterns. All regions of Oregon today are construction fewer units on a population-adjusted basis than in the two decades prior to the housing bubble. Note: 2018 data is not complete and not available for all counties yet, in part due to the Federal shutdown that delayed data releases. That said, statewide 2018 permits were down relative to 2017. One more year of data isn’t saving us.

Turning the above into a direct analog to the permit chart used yesterday shows the drop in new construction relative to population growth in percentage terms. Some regions look better here than in the older chart. For instance, Senator Golden’s Rogue Valley is down 50% in absolute terms but is down “just” 31% on a population growth adjusted basis. Conversely the Columbia Gorge is issuing a third fewer permits in recent years, but population growth has surged and on a population-adjusted basis they are seeing 70% less new construction.

Finally, the potential issue of differences seen in the Portland area versus the rest of the state was raised. This is the part I stumbled all over myself, but did manage a correct but incomplete answer. First, as seen above, the low levels of new construction truly is a statewide (and region-wide) problem. Portland is building more units today than 20 years ago, but not on a population-adjusted basis.

That said, we are seeing diverging trends lately in Portland versus the other markets in the state I have looked at. We know the Portland housing market is rebalancing. The increase in new multifamily construction is now slowing rents across all price points, and Mike testified yesterday. And for sale inventory is rising and home prices slowing. However, none of this appears to be happening elsewhere in the state. At least as far as I can tell (email me). In Bend, Eugene, and Salem, for instance we are not seeing an increase in inventory, or time on market, and price appreciation remains in the high single digits over the past year. Furthermore, the increase in multifamily is nearly entirely confined to the Portland region. Multifamily activity in the rest of the state remains 30% lower than two decades.

Bottom Line: The housing supply and affordability challenges truly are statewide issues. The increase in new construction activity in recent years has barely kept pace with the increase in population growth. A market imbalance remains. That said Portland is rebalancing and the supply of new apartments is beginning to hold down rents. However these trends are not yet seen elsewhere in the state. Over the next couple of years, with a little more new construction, and slowing population gains, such trends should become evident in other markets, but we are not quite there yet.

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Posted by: Josh Lehner | January 23, 2019

Manufacturing’s Evolution (Timber- and Tech-Related)

The big piece of news this week, as reported by Mike Rogoway in The Oregonian, is the potential for another big Intel investment as they look to increase capacity and develop the next generation of chips. As I mentioned to Mike, this is great news for the regional economy for a number of different reasons. First, Oregon will see a large investment and construction boost just as the economy is slowing down. This is something the rest of the country will not experience; as such it should help maintain our stronger growth a bit longer. Second, and more importantly from a long-term perspective, this proposed investment and expansion signals that Oregon will remain the home to significant, cutting-edge R&D operations for the foreseeable future — in the case of high-tech this means at least the next 5-10 years.

Oregon’s high-tech manufacturing sector has not increase employment since the dotcom crash and is not really expected to either in the future. Our office’s forecast calls for stable employment overall, as some of the firms, like Intel, expand and some of the older tech manufacturers cut back. This is largely due to the high productivity of the industry, where investment and innovation increase but employment does not. That said, Oregon’s tech manufacturers remain an economic pillar of our region and we continue to see a shift in the types of jobs the sector employs. Currently, 43% of these jobs are in engineering, computer science, and software-related occupations. Another 18% are made up of managerial, and business and finance occupations. Taken together, 60% of Oregon’s tech manufacturing jobs are white collar, professional types. Production occupations — the workers who actually make things — account for just one out of every four jobs today.

This breakdown may be surprising, but is the continuation of trends we have seen in recent decades. Among our tech manufacturers, all of the growth in employment in the past 30 years is among these white collar, managerial and engineering types. The local impact in terms of R&D, innovation, patents and the like is also driven in large part by these jobs. They are also very high-paying as the overall sector’s average wage in 2017 was $126,000, or more than twice that of the statewide average. Now, production jobs within tech manufacturing have held fairly steady since 1990, but have certainly not seen similar growth. It should also be noted that these production jobs, like production jobs in other sectors, pay an average wage of $40,000 per year. As discussed before, there is no longer a manufacturing wage premium relative to other industries, even within high-tech.

All of this brings us to a larger point about manufacturing jobs today compared to decades past. I was talking with Ron Fox, then the executive director of SOREDI, a handful of years ago. Ron wanted someone to make a manufacturing jobs poster to show high schoolers how the industry has changed. The poster would have two pictures on it. The first would be calloused, greasy hands to represent manufacturing jobs of the past. The second would be clean hands at a keyboard to represent the manufacturing jobs of the future. Ron’s keen observation of the evolving manufacturing sector is correct. Today in Oregon there are nearly as many of the white collar, managerial and engineering types of jobs in manufacturing as there are production jobs. We have seen a big shift over the past 50 years. And more to Ron’s point, the type of work done by those working in production occupations has shifted as well. The work is more computerized and less manual, although not entirely so of course.

Now, there a number of caveats and facets to this discussion. First, the stagnation and decline of production jobs in Oregon and across the country is a problem. See our job polarization report for more. Second, a good chunk of the trends above can be explained by what our office calls The Changing of the Guard in Oregon’s economy. This refers to the fact that the rise of Oregon’s high-tech sector has nearly perfectly offset the decline of the timber industry. (Not that it was harmless, just that the two sectors’ trends have offset.) We can see this in the chart above as well. Roughly half of the white collar job gains statewide are due to the tech manufacturers and much of the production and all other employment declines are tied to the timber industry (all other includes loggers and truck drivers who work directly for manufacturing firms and not third parties).

All of that said, the rise of the white collar manufacturing jobs is still seen among Oregon’s non-tech, non-timber manufacturers as well. Back in 1970, the managerial and engineering type occupations accounted for 10% of all non-tech, non-timber manufacturing jobs statewide. Today they have more than doubled in absolute numbers and account for 25% of these manufacturing jobs.

Bottom Line: Even as the economy overall continues to evolve away from manufacturing and into services, there is a stark evolution taking place within manufacturing itself. White collar, managerial and engineering type jobs are on the rise, through good economic times and bad. This growth is good news for our regional economy, from an employment, wage, innovation and R&D perspective. It also shows how the U.S. and Oregon are growing the portions of the value chain where we have a competitive advantage relative to the rest of the world. That advantage is not in the low-cost, mass production of products, but in the development process. That does not mean that the stagnation and decline of production jobs in the U.S. and in Oregon is costless because it certainly is not. Even if on net the good outweighs the bad, there are localized impacts on regional economies and among certain types of workers.

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Posted by: Josh Lehner | January 16, 2019

Working from Home

As an economist, I’m fascinated and intrigued by start-ups and entrepreneurship. In part because they’re so vital to productivity and economic growth. In part because they’re at or near historic lows. And in part because we do not fully understand the motivations and drivers of these trends. I also tend to lump the self-employed and those working from home into this same general discussion. In my mind, from a big picture perspective, they all kinda, sorta do the same thing. They’re on their own. They’ve identified an opportunity to better serve customers and clients, or find a better work-life balance for themselves, and the like.

However this is not entirely true. There is overlap among these groups, but it is not perfect. For instance, here in Oregon only about one-third of the self-employed work from home, while about half of those working from home are self-employed. There is a wider and more diverse swath of such workers than I thought when it comes to workplace arrangements. The rest of this post will specifically focus on those working from home.

It turns out that significantly more Oregonians work from home than in the typical state. In fact, Oregon ranks #2 behind Colorado when looking across the country. Vermont, Utah, and Montana round out the Top 5, with our northern neighbor Washington ranking sixth. Furthermore, such work arrangements are rising somewhat over time, with much of the increase occurring in the past couple of years.

If we dig down and look across the nation’s metro areas, we find that Bend is the Work from Home Capitol of America. Bend ranks first among the 288 MSAs from which I pulled published Census data. Not far behind, Medford ranks #4 in the country. All of Oregon’s metro areas rank in the top quarter nationwide. (Both the published Census tables and the microdata missed some smaller metros, including Albany and Grants Pass.) The rest of the Top 10 include: Boulder, Lawton, Asheville, Fort Collins, Raleigh, Santa Cruz, Denver, and Austin.

The questions then become, who are these workers, what do they do, and why do they work from home? We have some partial answers here that I find pretty interesting.

First, those who work from home are about 6 years older than the workforce overall (median age is late 40s). Their earnings are also bimodal in that they have a larger share earning more than $75,000 per year, but also more with low or negative incomes (I assume due to business losses). Such workers are seen across all major occupational groups. Again, they represent a wide and diverse swath of the economy.

Why these folks work from home is a bit more complicated. Using an updated Housing Trilemma dataset, I was able to look at the nation’s 100 largest metro areas and see which variables influenced the patterns of working from home. What I found in a basic model is that job growth, start-ups, and quality of life all are positively correlated with working from home and statistically significant. I also found that home prices were negatively correlated and statistically significant; that is, the higher home prices are, the lower the share of working from home. What I also found was that the cost of living in general, commute times, and software jobs were not statistically significant. They were all correlated with working from home and had the expected sign, but offered no explanatory power in the model.

My takeaway is that economic vitality and quality of life drive the working from home patterns see among large metros, with housing costs offering an assist.

Lastly, I want to highlight two key aspects seen in the data. One is that among high work from home regions of the country, these higher shares are seen across all occupational groups. And just like Portland leads the typical metro area — see chart below — Portland similarly trails across the board when stacked up against Austin and Denver. Note that Art/Design/Entertainment is driven by higher work from home concentrations among designers, writers, photographers, and artists.

The second major item I found was that when looking at Bend, Eugene, and Medford specifically, these individuals who work from home are diversifying their regional economies. I feel like I’m burying the lede here because this is, in my mind, the most important finding from an economic perspective. That is, the occupations that have high local concentrations in those working from home, are also underrepresented occupations when looking at the regional economy.

In Bend we can see this among Architecture and Engineering, Business, Finance, Legal, and Arts, Design, and Entertainment occupations. These are individuals who most likely want to live in a place like Bend and either brought their job with them or set out on their own to make it work, which we have discussed before with Bend. These types of jobs are also more portable than janitors, teachers, chefs, and the like. They also tend to require a college degree. See here for a similar Eugene chart and here for a Medford version.

Bottom Line: Working from home is on the rise, but remains a small component of a regional economy. Importantly, these folks working from home are diversifying their regional economies, even more so than the payroll survey (employment report) may indicate. Remember about half of all Oregonians who work from home are self-employed and thus not generally counted in the payroll survey. One potential risk is that working from home (remote work) may be more susceptible during a downturn when companies tend to cut the spokes and consolidate at the hub. This is our office’s long-standing concern for the outlook of Oregon’s software sector. However this is just a risk and not a foregone conclusion. Some businesses do not even have physical space any more, for instance. These trends will be interesting to watch in general and over the next business cycle. Now if we could just get more start-ups and better productivity growth…

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Posted by: Josh Lehner | January 10, 2019

Retirements are Coming

Demographics are a powerful force. Next year the oldest Baby Boomers will turn 75 years old. In fact, over the next decade the fastest growing age cohorts in Oregon will all be 70 years old or older. Now, even though Oregon sees a little bit of retiree migration, this growth is almost entirely about the aging population.

The aging of the Silent Generation and the Baby Boomers is also having a tremendous impact on the regional and national economies. See Conor Sen’s recent article for more. It is weighing on growth rates of pretty much everything as they are exiting the workforce and shifting their incomes from wages to retirement accounts and Social Security. Over the years our office has covered much of this ground, however it’s been a few years since we’ve specifically discussed retirements and the outlook.

A handful of years ago we expected 2016-2020 to be the peak of the retirement flows, that is the absolute number of retirements each year would be at their largest. Well, this hasn’t come to pass. In fact, over the past 3 years, actual retirements in Oregon have been only about half of what would have been expected based on demographics alone. Why? Older Oregonians are working to a larger degree. This goes for both relative to the past decade, but also when put in comparison to historical figures.

60 year old Oregonians are working at their highest rate today than at any point in recorded history (data back to 1900, not shown here). Additionally, Oregonians in their mid-60s through early-70s are working at higher rates than anything we’ve seen since the Great Society and War on Poverty began. There was a big decline in employment among older cohorts after the introduction of cost-of-living adjustments for Social Security in the 1950s, Medicare in the 1960s, and increases in old-age survivor benefits, SSI and the like. But these trends have reversed some in the past 20 years.

A key question is whether or not this increase in employment among older Americans and Oregonians is a good development. As we’ve previously discussed (HERE, HERE) there are a number of factors at play. (This also borrows from ECONorthwest’s Dr. Kevin Cahill’s work as covered a bit more in the second link)

Some, like the increased social security retirement age, lower savings and private pensions moving to defined contribution, mean older Americans are more exposed to macroeconomic fluctuations than previous generations and as a result need to work later in life. Others, like higher levels of educational attainment, improved health and less physically demanding jobs, allow individuals to work later in life if they choose to. While such changes impact individuals and their want or need to work, employers also face challenges and opportunities with older workers too.

Note that the increase in employment among 65 year olds may be in large part due to the increase in Social Security’s full retirement age from 65 to 67. This change was made in 1983, and age 67 fully impacts those born in 1959 or later. That said, we have seen similar, proportionate increases at age 67, and at 69 so it is unlikely Social Security is the only factor here.

Now, while older Oregonians may be working later in late for good and/or bad reasons, it has certainty been beneficial for local businesses. Companies are able to retain these workers with a lifetime of experience and institutional knowledge for their industries and firms. Such workers cannot instantaneously be replaced. It creates challenges for businesses to adjust and adapt when such workers exit the workforce. So keeping them in the labor force awhile longer is beneficial overall, particularly in a tight labor market like we have now.

All of that said, we know Father Time is undefeated. Given the underlying demographics, retirements are expected to remain at high levels throughout the coming decade. If we only look at the age distribution of the population, retirements are expected to be largest during the next few years. However, given we have seen employment rates and labor force participation rates (LFPR) rise in recent decades, some continuation of these trends is likely warranted given the discussion above. Even under this scenario where firms are able to retain their workers for a few more years, retirements will more or less hold steady at these historically high levels for the coming decade.

Bottom Line: Retirements will remain at high levels for the coming decade. The demographic crunch is here to stay for the foreseeable future. This puts pressure on the labor market in terms of businesses looking to hire and expand. It also opens up opportunities for younger workers to step into leadership positions. The generational churn in the labor market will mask job opportunities as net growth rates will be lower than in the past. For every retiring worker, a firm has to hire 2 workers to see positive job growth. The first worker simply replaces the retiree, representing no net growth. In the coming years, our office’s baseline employment outlook calls for <1% annual gains, with jobs increasing by 10-20,000 per year. Given retirements, the actual number of job openings for Millennials, Post-Millennials, Gen Z, or whatever we end up calling today’s youth, will be at 2-3 times as large. There will be enough jobs.

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Posted by: Josh Lehner | January 8, 2019

Migration Diversifies Oregon, Barely

A couple years ago we examined Oregon’s diversity and the fact that Oregon’s foreign-born population is fairly similar to, albeit smaller than the U.S. as a whole. Now, Oregon does have a somewhat larger Mexican-born population, but many such residents moved to the U.S. during 1980s, 1990s and through the housing bubble. Few have migrated in the past decade or so for a couple of main reasons. First, due to the housing collapse and Great Recession, there were scarce job opportunities here and Mexico’s economy has done well. Second, the falling birth rate in Mexico over the past couple of generations means there are relatively fewer potential migrants than in the past. Now, a lot of pixels have been written in recent years about the big shift the U.S. has seen among international migrants. No longer do most come from Mexico or Central America. Now most come from Asia. Here in Oregon we see similar trends.

Overall, those moving to Oregon are somewhat more diverse from a race and ethnicity perspective then the current population. However these shifts are on the margin when compared with national figures. The vast majority of new Oregon residents are non-Hispanic whites that largely moved here from other states. In fact, new residents are surprisingly, at least to me, less likely to be Hispanic or Latino then current residents in the state. Breaking this down a bit further, Hispanic or Latino foreign migrants to Oregon account for just under 3% of all Oregon migrants in the most recent Census data. The other 9 percentage points of Hispanic or Latino migrants arrived from other U.S. states. These figures are lower then nationwide estimates.

Where new residents differ the most is the higher share of Asian migrants — twice as large as the current population in percentage terms. The breakdown here is about 34% Chinese, 11% Japanese, and 55% all other Asian countries or pacific islands (this is self-identified race and combines both domestic and foreign migrants to Oregon). This differs quite a bit from the current Asian population in Oregon which is 21%, 6%, 72%, respectively. One key aspect to Asian migration is the impact on our colleges and universities. This increase has been beneficial for our higher education system and regional economies, however as such enrollments dropped the last couple years, it has been somewhat of a drag on growth.

Now, the big question is what does this mean and what are the implications for the economy? Well, it is hard to answer definitively whether Oregon’s general lack of diversity is holding back the regional economy. Growth this cycle in Oregon has outpaced the vast majority of other states, like always. However in a world where international trade in services is increasingly important, having a local workforce who can speak the language and know the customs of other cultures is important, in everything from business relationships to contract language and the like. Oregon has proven the ability over the decades to attract and retain talent as needed. However it is possible the lack of an existing workforce along these lines may preclude firms from opening and expanding here. This is potentially the opportunity cost for the regional economy. Similarly from an individual’s perspective, she may be less likely to live in a place where few people look like her, worship like her, and the like.

Bottom Line: Oregon is becoming more diverse over time. This is in part due to births, but also in part due to migration trends. However these shifts are small in any given year. Demographics change only slowly over time, but are powerful forces.

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Posted by: Josh Lehner | December 27, 2018

Oregon’s 2018 in Review

2018 was another banner year for the economy. Jobs in Oregon are on pace to increase 2.1% which is good growth for the ninth year of an economic expansion. More importantly these gains are still strong enough to accommodate the influx of new residents and the Oregonians entering or coming back into the labor market. The unemployment rate is on pace for another historic low at 4.0% even as the population grows and participation rates by age cohorts are higher than a few years ago.

While topline indicators look great, improvements continue to be seen underneath the surface as well. In the past couple of years, economic growth is translating into better economic outcomes, including rising incomes, across Oregon’s industries, regions, and racial and ethnic groups. As such, two of the biggest under the radar outcomes this past year are rural areas regaining their employment levels from a decade ago, and the poverty rate for Oregon’s communities of color reaching a likely historic low.

First, let’s look at employment in rural Oregon. Both urban and rural areas of the state, in aggregate, lost the same percentage of their jobs during the Great Recession. However, urban areas returned to growth first — Portland in particular, being the biggest and most diverse economy in the state — and have been at historic highs for years. Rural areas, on the other hand, spent nearly 4 years at the bottom of the Great Recession with meaningful job growth only returning in 2014 or so. Fast forward to today, employment in Oregon’s rural counties is now back to where it was prior to the Great Recession. This is not a destination, but is an important milestone to note.

Of course there is a lot of variation across rural Oregon. Every county and regional economy is different. Places like the North Cost, Gorge, and Northeastern Oregon have all done and continue to do well. Our southern regions have seen less robust gains. That said, the median rural county is 80% recovered in terms of jobs today relative to pre-Great Recession peaks. Only a few have seen hardly any growth this expansion, namely Crook, Gilliam, Grant, and Harney. Looking forward, Oregon’s rural economies will continue to grow and improve. The vast majority of the demographic drag is in the rearview mirror.

The second major under the radar milestone reached this past year is a likely historically low poverty rate for Oregon’s communities of color. I say likely because Census redesigned the race question in 2000. Before then a person could only choose one race, where as beginning with Census 2000, a person could choose multiple races. As such historical figures are not perfectly comparable to current figures. I also only went back to Census 1980 to crunch the numbers. That said, we know from earlier work that the economic recovery is reaching all groups in Oregon even as big racial gaps remain. And even though this refers to 2017 data, it was released in 2018.

Now, just as there is not one uniform rural Oregon, there is considerable variation among the various racial and ethnic groups in the state as well. Relative to recent history, American Indian and Alaska Natives in Oregon currently have a record low poverty rate, as do Hispanics. Black Oregonians are near historic lows, but they current experience poverty rates about one percentage point higher then seen in 1999 or just as the economy crashed a decade ago. Poverty rates seen among Asian or Pacific Islander Oregonians are somewhat higher than a decade ago.

As discussed before, big disparities remain in the economy. This includes industry trends, geographic differences, outcomes by race or ethnicity, or outcomes by educational attainment, and the like. However, as the expansion continues, these disparities are expected to narrow. A tight labor market does wonders, even if it does not cure all ills. 2018 was another example of this and expectations are 2019 will be another good year for the economy.

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Posted by: Josh Lehner | December 19, 2018

A Few Thoughts on Wealth

Economists have tons of data and research on current incomes. However we have considerably less on wealth. In fact we have next to nothing at the regional or local level. Given the increased concentration of wealth in recent decades, and the aging of the large Baby Boomer generation, wealth is becoming a larger component of our community, economy, and potentially our tax revenues.

Now, the first thing I think of when it comes to wealth is housing, or home equity. This is particularly true in recent years given the housing market. Owner occupied home equity in Oregon, as a share of personal income, or as a share of GDP, is at an all-time high. Across the country, home equity in a primary residence is about half of the typical family’s net worth. But among families in the bottom 75% of the distribution, housing wealth is essentially all they have, if that.

However, while home equity is the major source of wealth for the vast majority of the population, that is not the case for the highest net worth families. In looking at the Federal Reserve’s triennial Survey of Consumer Finance over the years, the value of a family’s primary residence is about 15% of the total assets for those in the top 10% of net worth. Financial investments and equity in privately owned businesses account for the lion’s share of assets for such families.

These trends and factors come into play regarding Oregon’s estate tax. Such collections have greatly outstripped our office’s forecasts in recent years. Our revenue outlook is tied to asset values and demographics, but also dampened some by the expectation of estate tax planning based on feedback from our advisors. The total number of taxpayer subject to the estate tax hasn’t increased much in the past 15 years, but the value of these estates certainly has. One further, unpredictable factor here are deaths and when our friends and family pass away. We know not everyone passes perfectly in line with actuarial tables, helping to drive some of the volatility seen in tax collections.

While there is considerable fluctuations in estate taxes, capital gains are even more volatile. There are myriad factors at play including when a taxpayer chooses to realize gains based on their value, or the taxpayers need for income to pay the bills. That said, the hardest component here when it comes to capital gains is the fact we do not have good information on what the cost basis for these gains actually is. Is the gain based on an asset (a stock, or business, or house) that was purchased recently, or one that was bought decades ago and which there are considerable unrealized gains?

The answer to this question is a known unknown, it varies tremendously by taxpayer, and is something our office regularly discusses with our revenue advisors. Given we are now in the midst of the third major run-up in asset values and capital gain realizations in the past 20 years, our office is concerned about the outlook going forward. Not in the sense that asset values with crash — that is always a risk — but in a bigger sense about the stockpile of potential capital gains outstanding. With the dotcom crash and housing bubble, the economy has recently underwent two major purges of capital gains. It is possible that taxpayers are tapped out and we will not see the same type of revenue growth moving forward, or rather, tax collections will be even more closely tied to current asset prices with less alpha and more beta than the underlying economy.

Well, it turns out this may be less of a concern then we first thought. The average amount of unrealized capital gains for privately owned business and for financial assets (excluding retirement accounts) are back to all-time highs as of 2016. Potential real estate gains were not back to their bubble peaks just yet, but as seen at the top of the post, we are here in Oregon and the U.S. is closer with an additional two years of rising prices.

Now, with a bit of further numerical gymnastics, we can estimate the total stockpile of U.S. unrealized capital gains and then share that down to Oregon based on the growth in our high income households over the years. This is not a perfect look, but is as good as we can do given the lack of local data. And it turns out that if you match up these estimates of the unrealized capital gains with actual realized capital gains as reported on tax returns, they line up pretty well.

It is interesting to note that at the peak of the past two cycle, the trends in realized capital gains outstrip the trends in the underlying stockpile of unrealized gains. Does this represent profit taking at the top of the cycle? Or that taxpayers are no longer delaying their gains/gratitude as much? Or that there is considerably larger capital gains from current economic activity driving revenues, and not being as reliant upon long-held assets? Whatever the case, at least in 2016, this top of the cycle behavior was not yet happening. That said, given the increase in realized capital gains in 2017, expectations for strong 2018 tax filings, and now a stock market that is largely moving sideways or down in recent months, this gap may be happening today or in the near future. We will have to wait for more tax collection data and the 2019 SCF to know for sure.

Finally, in large part due to the volatility of estate taxes and capital gains, Oregon policymakers during the 2017 legislative session, passed Senate Bill 1566 which will direct some of these revenues — when they are above their 10 year growth trend — to help with the PERS unfunded liability.

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Posted by: Josh Lehner | December 12, 2018

Reconsidering Single Family Zoning

As policymakers, builders, and the market work to solve the housing supply issues, a key question everybody asks is what type of housing do we need? Aren’t millennials always going to be renters? [No] Should we grow up, or out? Our office’s simple answer is yes. To accommodate recent and expected growth we will need to see housing supply pick up across the spectrum. This includes both an increase in the effective (buildable) land supply and redevelopment opportunities on lands within our existing communities. This is especially true for areas with good access to employment centers, stores, restaurants, transit and the like.

While most housing discussions — at least ones our office are a part of — tend to focus on land supply and new construction on the urban fringes, the redevelopment aspect is also an integral part of the housing supply solution. Despite this post’s title, I don’t want to get bogged down in the zoning weeds here. That said, there are a number of important aspects to discuss and points to consider. Lately I have incorporated more of this work into presentations, including for recent Bend and Portland forecast events.

The crux of the matter is land is the scarce commodity here. Outside of lava flows and seawalls, we’re not making more of it. As a region grows, so too does housing demand which places upward pressure on housing costs. This is great for homeowners as wealth builds, but bad for renters and the economy more broadly. Provided we, as a community, actually want to address affordability and accommodate future growth, increased construction is a must.

The problem is in many places one cannot simply build more housing due to zoning restrictions (minimum lot size requirements, setbacks, parking etc). However, if a community were to allow for more units to be built on a given parcel of land, then better affordability can be achieved, and future growth more efficiently accommodated. This is for at least two reasons. First, one would be dividing high land costs over a larger number of units which both lowers cost per unit and increases supply relative to existing zoning. Second, each unit will be smaller than under current zoning, which also lowers the cost per unit.

Currently the City of Portland is considering making changes to much of its single family zoned neighborhoods. Minneapolis recently passed similar zoning changes and Seattle has been wrestling with the possibility in recent years. Now, the proposed changes are not for high rise construction throughout the city, but it would allow for townhomes, duplexes, and triplexes to be built, the so-called missing middle housing. A recent analysis by Johnson Economics for the City of Portland confirms such changes would greatly increase housing supply and improve affordability relative to the status quo. Full disclosure: Jerry Johnson is a member of the Governor’s Council of Economic Advisors, our office’s main advisory group.

Essentially what the analysis finds is the net increase in new housing units in the City of Portland would triple relative to current policies and rents for the new units would be half the price. How is this possible? As the report says: “the net impact is expected to be a greater proportion of redevelopment being multiple-unit properties, providing greater net unit yield and lower average price points as a result.” Now, these new units are not cheap, as new construction is expensive, but allowing for townhomes and quads instead of just large, detached single family homes does reduce the price per unit. Additionally, this outcome does not result in a big increase in demolitions of existing homes either.

Specifically, the analysis finds the net increase in housing units on the potentially rezoned parcels would be 1,800 per year over the next 20 years. This is both massive for a single policy change and modest from a growing, regional perspective. In looking at population growth and household formation forecasts for the entire Portland region, this proposed change equals 13-15% of the annual increase in housing demand. By simply allowing for — not requiring — townhomes and triplexes to be built on existing lands in the City of Portland, the policy can accommodate 1 out of every 7 new Portland area households in the coming decade. That is a big finding. Now, on a regional scale it is a bit more modest as we still need to figure out where the other 6 new households will live.

Finally, while I believe the most important aspects from an economic perspective are affordability and supply, there are myriad concerns and societal issues that come along with growth and changes. Growing pains are real, even as they are much preferable to the pangs of decay seen through the Rust Belt and elsewhere. That said, as we have discussed before, there are also some real economic and societal benefits to missing middle housing.

All of these benefits accrue to individuals, their households, their communities and help address public policy issues at the same time. Townhomes are more affordable than detached single family homes*. Missing middle housing allows for somewhat denser neighborhoods which supports local businesses, a more walkable neighborhood while also not towering over neighboring buildings as high rises do. Providing housing options within existing neighborhoods also better allows one to age in place, and older residents do not have to leave lifelong friends and relationships to downsize as their housing needs change. Missing middle housing, through better affordability and providing options results in more integrated neighborhoods which is one of the five key characteristics of high economic mobility communities. Finally, missing middle housing reduces the environmental impact and, crucially, makes more efficient use of existing infrastructure.

From our office’s view, addressing housing supply and affordability is key to Oregon’s long-run economic growth. If households cannot afford to live in or move to Oregon, it puts our biggest comparative advantage at risk: the ability to attract and retain young, skilled workers.

* In presentations I like to give a personal anecdote to illustrate this dynamic. A couple years ago a builder tore down an old ranch on a double lot just around the corner from my house (4 tax lots away). It was replaced with two single family homes that sold for about $700,000 and $800,000. Only 10-15% of Portland area households could afford a home in that price range. At the same time this was happening, a builder tore down an old bungalow directly across the street from our house. It was replaced with two townhomes (a duplex) that each sold for about $450,000. While this is still expensive, and above market averages at the time, 30-35% of Portland area households could afford a home at that price point. In this sense, missing middle housing is 2-3 times as affordable as detached single family homes.

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